Why The New York Times Could Be A Surprise Winner In 2018

Gene Marcial
, ContributorI have an insider's take on Wall StreetOpinions expressed by Forbes Contributors are their own.

Photographer: Michael Nagle/Bloomberg

Although most New Yorkers are avid readers of the
New York Times, not many on Wall Street are passionately bullish on its stock. Yet in 2017, shares of the widely influential and globally respected newspaper pulled an unlikely surprise: It ramped up to a new high of more than $20 a share, way up from its 52-week low of $13.

That prompted several astonished Street analysts to try to figure out what’s going on at the company, whose stock had been flat since mid-2014, when it had climbed to $16 from around $8. So what is transporting the stock to fresh new high levels?

Could it be partly because the
New York Times is one of only a few U.S. national newspapers (along with the privately held
Washington Post) that have been critical editorially about President Donald Trump and his meandering offensive attacks not only against his political rivals but against other countries, including African nations? It isn’t a secret that the president’s popularity has sagged since his electoral victory to a low of little over 30%.

That could be true, but a number of analysts believe there are other fundamental reasons behind the sudden revival of the otherwise sleepy stock.

“We note investor sentiment has recently improved, partly on results that showed continued strong gains in digital advertising and digital-only subscriptions,” observed Tuna Amobi, equity analyst at CFRA. The rise in the subscriptions benefited, he said, from a "continued strong addition of paid digital subscribers" amid continued steep declines in print ads.

Apparently the
Times isn’t yet out of the woods. “We surmise that fourth-quarter guidance by management portend persisting near-term cyclical and likely secular challenges for the core print business,” added Amobi. “Still, we think NYT has relatively ample liquidity and financial flexibility,” he argued.

Part of the newspaper’s improved operations has been its ability to somewhat stabilize its business by shifting toward paid access to its content versus advertising, after a multi-year divestiture of certain-non-core businesses, noted Amobi. Indeed, the company has been trying to strike a balance between access and paid subscriptions. So the analyst sees a “gradual conversion of online readers to paid digital subscribers, which was approaching 2.5 million by the end of the 2017 third quarter. However, he expects the pace of new subscriber additions could slow to a "potential moderation towards the latter part of the year."

So there’s some good news for the
Times despite the continued decline in print ads that some analysts say could persist through the end of 2017, or possibly into early 2018: Revenues are projected to rise -- after dipping 1.6% in 2016, to $1.56 billion -- by 6.6% in 2017, and 3% in 2018, figures Amobi.

There is also positive news on profit margins and earnings. Amobi projects adjusted EBITDA margins of 15.5% in 2017, and 16.1% in 2018, a modest expansion from 2016’s 15.5%. However, the improvement, although modest, reflects an increased mix of digital revenues, reduced raw material costs, and efficiency improvements that were partly offset by higher personnel count and marketing expenses.

On the earnings front, Amobi forecasts that the company will earn 75 cents a share in 2017, and 76 cents in 2018 helped, possibly, by share buybacks. Tat's a huge jump from 2016's 19 cents a share. He also noted that the company has a "relatively ample" $5-a-share in cash equivalents, with a dividend yield of 1%. As of last week, Amobi still had a “hold” rating on the stock.

Alexia S. Quadrani, equity analyst at J. P. Morgan, who has a “neutral" rating on
NYT’s stock with a price target of $22 a share, is nonetheless impressed with what’s going on at The New York Times. “We continue to like the story longer-term, given the success of the company’s migration to digital, with growth in circulation cushioning ad declines,” said Quadrani. Over the near term, however, the positives of the growing digital business are "unfortunately still somewhat offset by challenges in print advertising,” warned the analyst.

At the stock’s current price, the stock continues to trade at a premium to other newspaper stocks, but is well deserved “due to the "favorabLe mix of healthy circulation revenues driven in large part by the ongoing digital expansion,” said Quadrani. And, “we are encouraged by this stronger news cycle and the clear benefit to circulation at the NYT, but also acknowledge it has been well reflected in the stock price, which is up 35% year to date" (as of Nov. 30, 2017) versus the S&P 500’s 15% rise.

For sure, the stock’s sudden surge in 2017 came as a pleasant surprise for shareholders, but the backdrop of its long inactivity n recent years should be taken into account in assessing its upward push. The stock is finally catching up with the extraordinarily ebullient market, and so there could be further upside for it should the encouraging business fundamentals continue to gain traction. Predictably, in such occasions, Street analysts start to upgrade their ratings which would predictably push its price higher.

So as dire as its previous business fundamentals were, the company’s improved operations now deserve investors’ attention, particularly among those looking to participate in the stock’s new surging mood of the stock.

And then there are other factors that could also help drive the stock even higher, including speculation that management could decide to increase the dividend. And, a stronger than anticipated rebound in newspaper advertising trends could also catapult its stock price to higher grounds. Advertising accounted for about 37% of total company revenues in 2016, while circulation contributed 57%. About 36% of 2016’s ad revenues were digital, way up from 2006’s 12%.

With the momentum on the digital ads rising fast, the outlook for further hefty gains is, indeed, looking brighter. And, of course, there is that undeniable Trump factor, which could provide the
Times its biggest triumphant gain yet.